ETF Watchlist: Week of September 4, 2017

I saw an article this week titled “This Stock Market is Immune to the News”. I always cringe a little when I read stories such as this because they strike a euphoric “nothing can go wrong now” tone that almost always ends badly.

The article does make a few fair points. The Brexit vote initially resulted in a sharp decline for equities before rallying and recovering their losses. The same thing happened on election night when the futures markets plunged before posting strong gains in the following weeks. Nuclear threats from North Korea, the withdrawal from the Paris agreement, the failure to pass healthcare reform, an investigation into Russia’s involvement in the election and a devastating hurricane have all failed to derail the financial markets.

As most asset classes continue to post gains, it’s important to remember one unfailing rule - the markets can and will correct. Right now, the economy looks strong. Unemployment is low, earnings growth has been solid, inflation is contained and the Fed is prepared to only slowly raise interest rates. Using an evidence-based approach, there’s little economic reason for a downturn right now. But the market doesn’t need a reason for moving the other way. Back in January 2016, the S&P 500 dropped 9% by the 20th of the month. There was no real impetus for the move other than many investors reset at the beginning of the year (although there was concern about a lack of earnings growth). Plus, North Korea or Russia could escalate tensions at any time, a move that could certainly cause the markets to turn quickly.

The lesson, of course, is to prepare yourself now while things are still in good shape. Waiting until a pullback occurs can lead to panic decision making and that could end up making things worse.

Hurricane Harvey was the biggest news story again this past week and much of this week’s ETF watchlist covers industries and sectors that could be affected by the storm’s aftermath.

The United States Oil ETF (USO)

U.S. oil prices have risen significantly in Harvey’s wake with several Texas refineries still offline. WTI crude prices are up about 5% in just the last week. The average price for a gallon of gas has risen 14% since August 20th. Energy ETFs have risen modestly on what should be a temporary disruption in oil disruption. With oil still below the psychologically important $50 level, energy companies are still in a position to struggle.

When folks think about segments of the economy that are affected by weather disasters, automobiles usually isn’t the first group that comes to mind. Yet, the hurricane has wrought a significant amount of damage for automakers. A number of dealerships are still shut down in and around the Houston area, and it’s estimated that thousands of new cars will need to be scrapped thanks to flood and weather related damage. Edmunds has already downgraded its August nationwide sales estimates by 2%, and expects September numbers could be impacted as well.

SPDR S&P Insurance ETF (KIE)

Total damage estimates for Hurricane Harvey are currently around $100 billion, making the storm one of the costliest in history. JPMorgan says that damage reimbursement payouts related to the storm could cost nearly one full quarter’s worth of the insurance industry’s earnings. When all is said and done, it’s estimated that the storm could cost insurance companies up to $20 billion.

Others: iShares U.S. Insurance ETF (IAK)

iShares MSCI Poland Capped ETF (EPOL)

For as well as the U.S. stock market has done in 2017, most foreign markets have done even better. Emerging markets, in particular, have been big winners producing gains, in many cases, north of 20%. The biggest single country winner this year? That would be Poland. The Poland Capped ETF is up more than 50% on the year. The country’s macroeconomic environment continues to be strong, while low interest rates and tame inflation have helped things along. Despite the run-up, Polish stocks still remain reasonably valued.

Others: VanEck Vectors Poland ETF (PLND)

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